Yoshida in China: SMIC rides on China fabless growth

SMIC's five consecutive quarters of revenue growth paint a picture of a new SMIC.

Chiu stressed, though, that SMIC’s 28-nm advanced development for both high-k metal gate and polySiON processes “continue to be on track and targeted to be ready by the fourth quarter of 2013 for customer design.”

He also explained that a 28-nm ramp-up is planned for SMIC’s Beijing second fab. Chiu also added, “We have a significant capacity in Shanghai able to address the 28-nm technology when there's a customer demand.”

It is, however, too early for SMIC’s Chiu to pop the champagne -- just yet. The battle for gaining shares in the 28-nm process market won’t be a cakewalk for SMIC. The more the company depends on the growth of Chinese fabless vendors, it also needs to be mindful of when and where they might stumble.

Where SMIC continues to hammer, though, is what the company describes as “differentiation strategy.” At a time when SMIC’s industry rivals -- TSMC and GlobalFoundries -- are fiercely competing for the advanced digital logic sector, SMIC is trying to carve out market share in selected differentiated technologies such as embedded non-volatile memory (eNVM), CMOS image sensors (CIS) and Power Management IC (PMIC).

The growing demand for smart cards in China is definitely helping SMIC on its eNVM technology offering. Chiu noted that two of SMIC’s customers recently had their bank card solution qualified by China UnionPay. He added that SMIC now has new PMIC customers ramping up, contributing to a healthy demand for its 0.18 micron process.

Demand for customization
While SMIC’s differentiated technology strategy sounds like a good idea, one of the financial analysts during the call asked how “sticky” SMIC’s so-called “specialty process technology business” is. His question challenged whether such a specialty process technology is something SMIC’s rival foundries can also offer if they choose, perhaps forcing SMIC to compete with them on price.

Chiu said, “SMIC’s average selling price has been relatively steady over the last few quarters, and that reflects our improved quality and service level.”

But in efforts to keep its customers satisfied, Chiu explained that SMIC has spent “a significant amount of time to modify its process to meet some specific needs for each of these applications.” He added, “so that they will stay with us not just because of wafer pricing.”

SMIC expects Q2 to grow three to five percent sequentially, resulting in “six consecutive quarters of growth.”

SMIC is also revising expansion plans for its 12-inch capacity in Shanghai, from the previous goal of 12,000 wafers per month to 15,000 at the end of this year. This reflects continued demand for 40-nm and 45-nm process, “servicing primarily mobile-related applications as well as the strong demand from the China region,” Chiu explained.

However, he added that of 15,000 wafers set up by year’s end, “about half will be ready to produce 28 nm, depending on customer demand.”

As for its 28nm process technology, SMIC has been working closely with IBM.
But over the years, SMIC has accumulated its own IPs. Earlier this year, SMIC announced that it has been selected as a 2012-2013 constituent of the Ocean Tomo 300 Patent Index.
The Ocean Tomo 300 Patent Index is the first stock index based on the value of corporate intellectual property. The Patent Index is composed of 300 companies chosen for the value of their patent portfolios relative to book value.
As of January 2013, SMIC claims that it held more than 3,000 patents, with 3,800 patent applications pending.